July 17, 2023      

SECURE 2.0 ACT

Revisiting Tax Credits for Small-Business 401(k) Plans

By Paul G. Masser, QKA

 

Not only is a 401(k) plan a great retirement tool for your employees, it can also be a great tax benefit for your business. Any employer contribution made to a 401(k) plan is a tax deduction for the company. Your company can also claim certain tax credits if you meet all of the following criteria:

 

1. You had 100 or fewer employees who received at least $5,000 in compensation from you in the preceding year; and 

2. You had at least one employee who was not a “highly-compensated employee.”

 

New Plan Tax Credit Increased by the SECURE 2.0 Act

If you are adopting a new 401(k) plan and did not sponsor a retirement plan in the three years before the year you start the plan, your company is eligible for a tax credit to help offset the plan start-up expenses.  While this credit has been available for some time, it has been increased for employers with 50 or fewer employees under the SECURE 2.0 Act and it is now equal to 100% of your implementation and administrative costs up to the greater of:

 

• $500 per year; or

• The lesser of:

• $250 for each non-highly compensated employee who is eligible to participate, or

• $5,000

 

Employers with 51 – 100 employees are still eligible for the tax credit but it is limited to 50% of the implementation and administrative costs (the dollar limits are still the same as listed above).

 

This tax credit is not a deduction – it reduces your tax liability dollar-for-dollar. If the tax credit is calculated to equal $4,000, then your tax liability is reduced by $4,000. You can claim this credit for the first three years that you maintain the 401(k) plan. The eligible start-up costs that can be claimed are the costs necessary to set up and administer the plan as well as costs associated with educating your employees about the plan. If you have a situation where you are not able to use the tax credit in the current year, you may carry it forward to future tax of fiscal years.

 

New Tax Credit Created by the SECURE 2.0 Act

SECURE 2.0 created a new tax credit that reimburses small businesses with 50 or fewer employees for a portion of any employer contributions. The tax credit starts at 100% of employer contributions made for each employee earning less than $100,000 a year (up to $1,000) and phases down over 5 years from plan adoption (100% Year 1, 100% Year 2, 75% Year 3, 50% Year 4, and 25% Year 5). For small businesses with 51 – 100 employees the tax credit is reduced by 2% for each employee in excess of 50.

 

As with any other tax-related matter, we highly recommend you speak with your tax advisers and/or CPA before taking any actions. If you have any questions regarding the content of this article, please do not hesitate to contact Benchmark Retirement Plan Services, Inc. for additional information.